If your salary is above the current thresholds, both you and your company must pay National Insurance Contributions to HMRC.
NI – the basics
The National Insurance system was originally put in place to protect workers during times of sickness and unemployment.
In recent years, National Insurance Contributions now accounts for an increasing proportion of total UK Treasury receipts. The NI system is seen by many as an additional income tax in all but name.
All UK employers pay Employers’ NICs on salaries paid to their employees, and employees pay Employees’ NICs on any income they earn.
Here, we look at how NICs are calculated, for both employers and employees.
This article has been updated for the 2022/23 tax year, including the Nov 6th 1.25 percentage point cut in all NIC rates.
National Insurance for Employees
If you’re a contractor, you become be an employee of your own limited company, an employee of an umbrella company employer, or in some cases, a PAYE employee of an employment agency.
As an employee, you pay Class 1 Employees’ NICs on earnings above the current Primary Threshold.
Unusually, the Primary Threshold changed during the 2022/23 tax year.
And, to add further confusion, the National Insurance rates also changed from November 6th 2022!
- From April 6th, 2022 to July 5th, 2022, Employees’ NIC is paid on salaries over £9,880 per year.
- From July 6th, 2022 onwards, Employees’ NIC is payable on salaries over £12,570 per year.
- If you annualise these amounts, the Primary Threshold for the 2022/23 tax year is £11,908.
- The Employees’ NIC rates are 13.25% (12%) between £11,908 and £50,270, and 3.25% (2%) above £50,270.
(In italics from 6th November 2022 onwards, after NIC rates were reduced by 1.25 percentage points).
If you work via an umbrella company or on a PAYE basis with an agency, income tax and NICs is deducted at source and paid to HMRC on your behalf.
If you work via your own limited company, you have more flexibility over your exposure to National Insurance.
Most limited company contractors pay themselves small salaries (either below, or just above the prevailing NIC ‘primary threshold’). This minimises any NIC liabilities.
Significantly, National Insurance Contributions are not payable on company dividends.
National Insurance for Employers
All employers pay Class 1 NICs on the salaries they pay to their staff.
If you work via an umbrella (or contract directly with an agency), your employer will account for employers’ NICs at source from your gross fees.
If you contract via your own limited company, the company must pay employers’ NICs on any salary payments.
As with employees’ NICs, the employers’ NIC rate fell by 1.25 percentage points from November 6th onwards.
For the 2022/23 tax year, employers’ NICs apply to salaries above £9,100 at a rate of 15.05% until November 5th 2022, and a rate of 13.8% from November 6th onwards.
No Employers’ NICs are payable if you draw an annual salary of £9,100 or less.
In April 2014, a new Employment Allowance was implemented. It currently reduces the Employers’ NICs paid by limited companies to their employers up to a maximum of £5,000 per year.
This results in a saving to limited company owners who pay themselves a salary above the £9,100 Employers NIC threshold. The eligibility rules have been tightened several times in recent years.
Other Types of National Insurance
The ‘self-employed’ pay Class 2 and Class4 NICs. Class 2 liabilities are paid via self-assessment (the rate is currently £3.15/week on earnings of £6,725 or more per year).
Class 4 liabilities are worked out via the self-assessment process each year.
Until November 5th 2022, the Class 4 rate was 10.25% on annual profits of between £11,908* and £50,270 per year, and 3.25% on amounts above £50,270. From November 6th onwards, the percentages were cut to 9% and 2%.
On an annual basis, this means the annualised Class 4 NIC rates for 2022/23 are 9.73% and 2.73% respectively.
IT contractors rarely work on a ‘self-employed’ basis; the vast majority pay Class 1 contributions only as limited company or umbrella company employees.
* The Secondary Threshold is £9,880 from April 6th, 2022 to July 5th, 2022, and £12,570 from July 6th, onwards. £11,908 is the annualised amount for the 2022/23 tax year.